Impact investors usually have two goals for their investment dollars: a financial return and a positive social and/or environmental impact.
For instance, if you invest in sustainable agriculture, you expect to earn a profit and help preserve the environment, promote animal welfare and support fair working conditions for the farmers. Or, if you invest in a solar power plant, you are looking to generate a return and reduce greenhouse gas emissions.
The Third Goal
A third goal for impact investors that is equally critical, and not often considered, is measuring and tracking your social and environmental impact. Just as measuring financial risk and return metrics is critical to gauging the financial success of your investments, tracking and understanding the level of positive social or environmental impact of investments is necessary for your impact-related goals and intentions to be meaningful.
Compared with financial metrics, however, measuring social and environmental impact is very difficult and rare. These nonfinancial benefits of impact investments can be hard to collect, quantify, compare or express in a simple manner. Think about how you would measure the social impact of bringing electricity to an off-grid community or providing access to credit to low-income populations in emerging markets.
Current State of Measurement
Partly due to the difficulty of accurately and cost-effectively measuring impact, the most common metric that we see impact-focused businesses and funds report today is the number of people that they reached through their products/services or the tons of greenhouse gas emissions avoided.
One benefit of this way of measuring impact is that it speaks to the success of the products/services with consumers, and the scalability of business models designed to deliver impact through market-based solutions. The downside, however, is that simplification leads to poor comparison across sectors and business models, and provides a one-dimensional approach to measurement.
The other challenges in this field are standardizing impact metrics and definitions to improve comparability across investments and businesses (similar to accounting rules for financials), and the lack of a third-party verification system (similar to the role that financial auditors play for financial returns).
Finding Common Ground
Responding to these challenges, one of the central initiatives in the impact investment space has been standardizing impact reporting metrics. IRIS (Impact Reporting and Investment Standards), an initiative of the nonprofit Global Impact Investing Network (GIIN), and Big Society Capital’s outcome matrix are examples of metrics for impact investors and businesses to measure their inputs, outputs and outcomes toward their impact goals.
These frameworks specify the main metrics that can be used to measure the impact in a certain sector. For example, for sustainable agriculture projects, metrics would include the volume of produce, area of land, reduction in use of fertilizers, reductions in greenhouse gas emissions and number of organizations with relevant certifications.
Impact Auditors?
Another important initiative has been developing a third-party verification and grading methodology, similar to Morningstar ratings or academic grades.
This is where the Global Impact Investment Reporting Standards (GIIRS) come in. Pioneered by B Analytics, these standards assess the business model and operations of impact-focused businesses and give them ratings (in the easy-to-understand format of number of stars and names of precious metals). The standard of verification is not close to how financials are audited, but this methodology opens the path toward standardized third-party verification.
Another example of third-party verification for for-profit companies is the B Corp certification (Abacus Wealth Partners is a founding B Corporation). Businesses have to “meet rigorous standards of social and environmental performance, accountability and transparency” to be certified as a B Corp.
Asking the Beneficiaries
Another innovation in this field is a recent initiative by Acumen that sheds light on one of the key differences between financial return and positive social impact. The former benefits the impact investor directly, while the latter normally benefits people the investor has never met. The question that Acumen is trying to answer is, why not measure impact by asking the actual beneficiaries about what mattered to them and how much?
The Way Forward
The field of impact measurement is a big challenge for all stakeholders involved—to measure, report, understand, improve, act upon. Standardized impact metrics will play a big role in the future of this sector. The good news is that overcoming this challenge promises to be highly rewarding not only for the parties directly involved but the world at large.
As impact investors, or someone who wants to become an impact investor, the best thing to do is to ask questions, understand how investments’ positive social and/or environmental impacts are being measured and what those metrics mean for the world. If you are investing in renewable energy, find out how the solution’s success is being measured in terms of its environmental impact. If you are funding low-cost private schools in Africa, find out how your investment is improving educational outcomes for the target communities. Doing that will motivate investment managers and underlying businesses to target higher impact goals, improve transparency and move money toward the best solutions.
